Why EU startups are an incredible opportunity for US investors

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October 30, 2012 1:31 PMStefano Bernardi

The funding and hiring environment in the Valley are crazy at the moment.

Valuations, even if not as crazy as a year ago, are still extremely high for seed deals, often reaching $10 – $15 million in some cases. Most top-tier investors realize that only 10 – 15 companies per year will generate the bulk of results and that the way to win is to compete to get into those deals . This means that hotter companies will be even more expensive.

This environment is becoming unsustainable for small angels.

And that’s where European startups should come into play. Let’s connect the dots:

* The US has lots of investors with skills and money who are having a hard time finding good startups at fair, or interesting, prices.
* The EU has lots of really good startups that are either having trouble raising money or are forced to accept less than interesting terms.

It seems just natural that US investors would start investing in those companies. The VC scene is growing in Europe and understands very well this new opportunity. Partnering with them should be a given for US investors, who could lead A rounds for European companies at reasonable valuations and help them tap their US network for hiring, partnerships, and acquisitions.

The Advantages

European startups have some serious advantages over NYC or Bay Area ones:

Lower Valuations. European startups will not command a $10 milliom pre-valuation for a just shipped product in a niche market. It’s not uncommon to see seed rounds of $200 – 300K at $1 million and see bigger rounds at $3 – 4 million valuations, with polished products and often paying customers.

Cheap Talent. In many parts of Europe, you can have top notch engineers making €40.000 – €50.000 (~$52.000 – $65.000). That means that you can have two senior European engineers for the price of one junior Bay Area engineer.

Growing Markets. European markets are growing like weeds, people are getting online more and more, broadband is being deployed constantly, and smartphones are getting ubiquitous. I can definitely see the day when it will become a bigger market than the US for tech companies.

With just a bit of help, European startups could (and in some cases already do) seriously compete with US ones. But this opportunities still doesn’t seem to be moving the needle for US investors, who are way more concerned with the big challenges that European startups face when trying to raise money overseas.

The Challenges

A lack of networking

Problem: European entrepreneurs, for obvious reasons, lack the networking needed to make it in Silicon Valley. This is a huge blocker for 90% of companies in all regards: funding, partnerships, sales, hiring, etc.

Solution: Participating in incubators that focus on providing this networking on both sides of the Atlantic is a very smart choice: Seedcamp, 500 Startups, and Mind The Bridge’s Seedquest come to mind as examples. [Disclosure: I’m on Mind the Bridge’s board of directors.]

Skills

Problem: In Europe it’s very hard to gain relevant experience at other startups, simply because there aren’t that many. Since the team is one of the biggest elements of evaluation, having worked in other successful startups is usually one of the biggest assets for entrepreneurs looking for funding. US investors also value the know-how that has been developed over the years in the Valley and know that there is a breed of incredibly talented entrepreneurs and employees who have mastered many of the skills needed to succeed in today’s markets, from scaling infrastructure to customer engagement. Lacking these skills may break a startup as well as prevent it from raising funds.

Solution: Working in a SV startup would be the ideal scenario, but gaining skills on the ground floor at some high-profile European startups is still very valuable. So experience at Spotify, Soundcloud, Rebtel, HouseTrip, Wooga, etc. is definitely going to be an asset. On top of that, European entrepreneurs should read and study as much as they can, while asking for help and advice from people in the Bay Area.

Acquireability

Problem: US investors have traditionally backed away from investing in European companies, because they are very hard to acquire. There are no relationships with bigger tech companies, and the logistics of acquisitions are just harder. Public markets are also much smaller and usually wary of tech stocks.

Solution: This is a tricky one, but starting by incorporating the company as a main US entity that controls a local one will definitely help.

Different Legal Frameworks

Problem: It’s also a pain to acquire companies because of the local work regulations, including the inability to fire, severances, etc. Not to mention the business risk.

Solution: Incorporating in the US is even more important here, as investors can put their money on a known entity with familiar laws. Solving legal framework problems is, unfortunately, extremely hard and needs years and years of policy work, so I don’t have immediate advice on this.

There are certainly many more challenges for European startups, but some investors and incubators are already understanding the potential, and I can’t wait to see everyone else follow.

Stefano Bernardi recently left his job in Venture Capital in Europe and moved to San Francisco to join the founding team of Betable, where he works on the platform product. He is a part-time hacker, angel investor, and product advisor, and was selected from more than 300 people to “shadow” Dave McClure at 500 Startups. You can check out his blog at http://bernardi.me/.